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The Bitcoin Crash That Never Came

After watching it survive Chinese legislation that attempted to ban the use of virtual currencies, we’re much closer to positive that Bitcoin is here to stay for good.
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(Photo: Alexander Kirch/Shutterstock)

(Photo: Alexander Kirch/Shutterstock)

When the Chinese government banned banking companies in the country from using virtual currencies in mid-December of last year, the value of Bitcoin promptly fell by half to under $500, causing naysayers to proclaim that a larger crash was imminent. The value of Bitcoin alternatives like Litecoin dropped in tandem. Things were looking very bad.

The popularity of Bitcoin in China was a big factor in the currency’s growth in late 2013, when as much as 60 percent of daily Bitcoin trading happened in Chinese yuan. Low-end investors bought up thousands of dollars’ worth of the currency while one Mr. Li, whom the Wall Street Journal names one of the country’s largest Bitcoin holders, amassed over $100 million. Virtual currency exchanges became an accessible alternative to the Chinese stock market, presenting an easy way to speculate at any level of the market.

Under the government’s ban, however, “You won’t be able to get your money off the platforms,” explained Zennon Kapron, a financial consultant in Shanghai. Since Chinese financial institutions simply can’t use the virtual currency, it’s impossible to exchange yuan for Bitcoin or vice versa, making it much less liquid as an investment vehicle.

But Bitcoin, in the weeks since the ban, has bounced back to over $1,000 on U.S. exchanges and $890 on BTC China, the country’s largest exchange. That’s because every time one business, industry, or government outlaws virtual currencies, many more come out in support of them.

The gaming company Zynga became the largest recent addition to Team Bitcoin when it announced on January 6 that it would start accepting the virtual currency. In partnership with the payment processing company BitPay, Zynga will allow players to make in-game purchases with Bitcoin in FarmVille 2, CastleVille, and CityVille, among others. The decision came “in response to Bitcoin’s rise in popularity around the world,” the company explained on Reddit.

Ironically, these games themselves make up virtual economies where players feed in real money for seemingly worthless digital commodities (the same critique that some level at Bitcoin). That means that while you might not be able to buy a real horse or barn or bushel of apples with Bitcoin, you can certainly purchase a pixelated facsimile thereof. Though it seems, to some, rather worthless, it’s easy to underestimate the size and impact of this virtual market.

MIT/Stanford Venture Lab’s Gigi Wang discovered in 2011 that players were spending $100 million a year on FarmVille’s in-game purchases. Today, the extremely popular mobile game Candy Crush is making an estimated $937,553 off of in-game purchases every day, according to Think Gaming. If it keeps up that rate for a full year, the company will net over $340 million.

As Bitcoin expands into new markets like these virtual economies, its value and utility increases, it depends less on speculation for its price, and the threat of a sudden crash becomes less likely. The rate of its adoption by businesses also seems to be increasing.

BitPay’s hyperactive Twitter feed presents a daily list of companies converting to the digital currency. You can use Bitcoin to buy a sensual massage in London, or tea from New Mexico, or a Tesla electric car in Miami. The online retailer Overstock has said that it will begin accepting Bitcoin this year, too. Bitcoin’s chief advantage for these businesses is its frictionlessness—it’s cheaper to transfer money through the virtual currency than through competitors like PayPal or Square. The companies’ support also shows that an alternative method for digital payments is necessary and makes Bitcoin’s survival more feasible.

In China, the virtual currency still occupies a hazy legal position. Regulators in Hong Kong met a planned Bitcoin ATM that would allow users to easily trade paper currency for virtual with skepticism. “Bitcoin is not regulated by the Hong Kong Monetary Authority,” a regulator responded. “Bitcoin is not a currency but a virtual commodity.”

Over time, as the value of Bitcoin and other virtual currencies stabilize, they will come to be seen less as commodities and more as simple vehicles for the exchange of value. Bitcoin’s resilience in the face of the Chinese legislation also shows that it’s less susceptible to government interference than some expected.

BuzzFeed translated Chinese Bitcoin users’ reactions to the government’s decision published on Weibo, the country’s Twitter equivalent. “Even if all the world’s central banks declared Bitcoins moot, they’ll still exist,” one commenter crowed. “Haven’t we suffered enough control from central banks?”

If all users indeed have so much faith in the digital currency, then it doesn’t matter much if Bitcoin can be easily traded for yuan or not. The end-game for virtual currency obsessives, albeit a highly unlikely one, isn’t just being able to swap their online holdings for paper money. Rather, it’s an independent economy based solely on Bitcoin in which dollars are no longer necessary and crashes in exchange rates irrelevant.